Econ 101 Winter 2010 Lecture 16

Econ 101 Winter 2010 Lecture 16 - Economics 101...

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Click to edit Master subtitle style Lecture 1 Economics 101 Microeconomics University of Michigan Winter 2010 Lecture 16
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Lecture 1 22 Chapter 5 of text Available on CTools No quiz this week in discussion Reading Problem Set 9
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Lecture 1 Efficiency of Markets Earlier claim: The competitive market delivers efficient outcomes When the price adjusts to clear the market then 1. All units of the good for which MV ≥ P are consumed 2. All units of the good for which MC ≤ P are supplied 3. Qd = Qs 4. Therefore every unit of the good for which MV > MC is produced and also consumed
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Lecture 1 Assumptions behind the efficiency of markets 1. All buyers and sellers in the markets are price takers If this were not true: n Demand and supply curves don’t make any sense n Predicted equilibrium is unlikely to obtain n Allocation of resources will likely differ from the “competitive” one
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Lecture 1 Assumptions behind the efficiency of markets 2. Property rights must be well defined and protected If this were not true n Difficult to motive exchange n Predicted equilibrium is unlikely to obtain n Allocation of resources will likely differ from the “competitive” one Example: Would you buy a new car
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Lecture 1 Assumptions behind the efficiency of markets 3. Informational asymmetries do not exis t If this were not true n Agents don’t know what they are buying/selling n Buyers and sellers with different information strive to extract information from the choices made by others
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Lecture 1 Efficiency of Markets What if 1. Buyers or sellers are not price takers? 2. All property rights are not well assigned or enforced? 3. Informational asymmetries exist? Market outcomes may not be efficient § ° “Market failure” § ° Possibility that other methods of allocating resources will generate more efficient outcomes
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Lecture 1 Market Failure We will try to address these issues when: n Buyers or sellers are not price takers; n All property rights are not well assigned or enforced We will not have time to examine: n effects of informational asymmetries between traders
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Lecture 1 Market Failure Part 1: Externalities We investigate a particular set of problems that arise when property rights are not well assigned Example: n Consider the rights to the air around us n Not well defined n Difficult to enforce, even if they were well defined n We cannot trade air – the market does not exist n Consequently, this is a resource that is inefficiently allocated n POLLUTION abounds in inefficiently high
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Lecture 1
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